Educational loan began as an incentive in 2001 for meritorious students looking to further their studies in professional and technical fields, but have no financial means to do so.

What began as a means of help by the Indian Banker's Association (IBA) soon began to be viewed by loan recipients as their right! Many didn’t repay the loans, leaving the banks with thousands of crores in unpaid debt. Unfortunately, current students have to bear the brunt of these non-repayments, as banks have become stricter while reviewing education loan requests.

There are Various Reasons an Educational Loan Request Could be Denied by the Banks:

Incomplete or fake documentation of the student and the joint applicant.

Correspondence, part-time, and distance learning is usually not considered viable for educational loans.

No admission letter from the recognized college/university.

One of the most common reasons for loan rejection and the one we are discussing here is the refusal of the loan due to the inadequacy of collateral. If you’re thinking that it is totally unintuitive for a bank to reject your loan request, especially when you provide collateral security – you’re not alone... we used to think the same until we dug deeper into collateral-related laws and regulations. Read on to find out why a with-collateral loan request might get rejected, and what you can do to increase your chances.

On What Basis Can An Educational Loan With Collateral Be Refused

One common reason is that the offered collateral is an unconstructed land, which either falls under a Gram Panchayat’s jurisdiction or is agricultural land. The chances of your loan application getting rejected in such cases are very high.

For an urban property offered as collateral, banks primarily go through the following key questions:

Is the property legal?

Is the ownership clear?

What is the value of the property?

Every Indian state has its own set of required documentation. All these documents have to be thoroughly reviewed by the bank. Any significant problem with them could lead to the loan application getting rejected.

One document due to which loans get rejected quite frequently is the Occupancy Certificate, also known as Approved Map in some parts. It is a document issued by your local municipal authority that ratifies your property’s construction. In case you purchased the property from a builder, then the builder will have this document. In case you have misplaced this document, you can apply to retrieve it from the municipal authorities. This retrieval is usually a time-taking process, around two months at least, so, start early!

To ensure that the property put up as collateral by you is not disputed, Banks ask for Link or Chain documents. These documents clarify the chain of ownership of the said property for the last 30 years. If you have owned the subject property for >= 30 years, then great – otherwise, you need to have a neatly arranged set of sale deeds tracing back the ownership for the last 30 years.

A common problem with link documents, or registration documents, is that a certain ownership transfer was established without proper documentation – something which is typical when the property gets transferred through inheritance. There are ways to rectify this, but such ways take several months to implement. If you are in such a situation, get in touch with a local property lawyer sooner than later.

We hope this article pushes you to act early to gather the correct and relevant documents – so you can avoid facing rejection in your loan application.

About author

Ankit Mehra
Ankit is the co-founder and CEO of GyanDhan. An IITK / IESE alum who previously worked at Capital One / Credit Suisse, his aim is to equalize and expand access to higher education. His interests include playing football (soccer), and basketball, trading/investing the limited money that he still has, and discussions on economics / politics.